c. myblog

February 4, 2016

Net Economic Value: 1 Tip on Effective Discount Rates

There are many tools that can be used to perform a model reasonableness check, or a model validation. Below we share a simple “sniff test” to help credit union CFOs and financial analysts assess one key assumption driving net economic value results, the effective discount rate applied to each loan category. Tip: Compare the effective discount […]

September 25, 2015

Observations From ALM Model Validations: High Starting NEV Ratios

When performing model validations, it is common to see a net economic value (NEV) ratio that is considerably higher than the credit union’s current net worth ratio. Understanding NEV and net worth are two completely different concepts; there are reasons why starting with a high NEV ratio in the base environment may not be reasonable. […]

July 30, 2015

NEV Does Not Equal NII

Some in the industry say that net economic value (NEV) is an indicator of future earnings. Let’s test this out by modeling a credit union taking $30 million of funds that are currently sitting in overnights earning 0.25% and investing them in mortgage-backed securities earning 1.75%. Even without a model, we know that net interest […]

June 18, 2015

Key Business Questions

When credit unions evaluate changes in strategy or financial structure, the focus from an A/LM perspective is often on valuation and net interest margin.  However, these traditional approaches to measuring risk will not answer several critical business questions.  Consider, does NEV or net interest income analysis allow a credit union to see: Under what rate […]

January 15, 2015

Evaluating Derivatives―Part II: Economic Value

In a previous blog, impact to earnings was discussed as it relates to derivatives and the insurance they can provide against a rising rate environment. While derivatives can be a good option for hedging interest rate risk, especially in today’s low rate environment, it is also important to consider how economic values are determined. Because […]

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